28 March 2022
Where are we in the Cycle?
Of the five PortfolioDirect cyclical guideposts, one is ‘green’, three
are flashing ‘amber’ and one has turned ‘red’. The central bank liquidity
surge and accompanying fiscal expansion to counter the effects of government
lockdown mandates is being reversed. Upgraded growth forecasts for 2021 had
been concealing a tendency for weakening underlying growth through the
course of the year and into 2022 as sluggish pre-pandemic growth drivers
resume their primary roles. Supply side constraints in metal markets remain
a positive influence on cyclical conditions. The cyclical positioning has
been characterised as near a peak and at risk of moving into a ‘downswing’
phase.
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Market Directions
The speculative capital flows connected to retail investors and
supporting sector equity prices is being threatened by the withdrawal of
unprecedentedly supportive monetary conditions, surging inflation and the
risk of a widening war in Europe. While heavily hyped energy storage
innovations are stoking interest and favourably impacting sector funding,
they are yet to affect demand meaningfully. Equity prices are receiving a
relatively moderate boost from rising metal price risk premiums due to
geopolitical fears. Persistence of a 1990s-style investment performance -
when modest sector equity price gains occurred in the midst of sometimes
highly disruptive macro conditions - remains the underlying theme.
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Portfolio Performance and Positioning
Phase I and Phase II stocks experienced relatively weak price swings
during the week with an even spread between gainers and losers despite the
broader gains among the sector leaders. The investment returns from Phase I
companies are threatened by the withdrawal of support by central banks for
speculative capital flows but they continue to benefit from discovery
opportunities uncorrelated with market conditions. Although further along
the development path, Phase II companies remain among the riskiest
investment options due to their indebtedness, heavy reliance on execution
success and need for strong global economic conditions to initiate sales,
making their risk adjusted performance less attractive than for Phase I
stocks. Performance within the Phase III category is more likely to be
driven by institutional allocations responding to changing macro
conditions. Portfolio models remain biased to the Phase I stock category
with cash positions reflecting the cyclical risks..
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Stock Reviews and Rating Analysis
PortfolioDirect rating reports analyse the quality and risk
attributes of proposed mineral developments. Rating criteria apply to mining and oil and gas stocks at any stage of
development. PortfolioDirect uses a five point rating
scale to measure the risk adjusted quality of proposed mineral developments
or companies.
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The 'Steak or Sizzle' blog provides summary judgements on
the top performing ASX-listed resources stocks.
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